Venezuela’s oil industry returns to the world market

The country’s government has promised the opposition clean elections for 2024. In return, the U.S. wants to gradually ease its sanctions. It is uncertain whether President Maduro will keep his side of the bargain.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Finally, some good news from Venezuela: The U.S. Treasury Department announced on Thursday that the previously banned trade in oil from the Venezuelan state oil company PDVSA is now permitted again.

Foreign companies are allowed to act as suppliers to the state-owned company in Venezuela’s oil sector without having to fear sanctions from the U.S. authorities. Financial transactions, such as trading in Venezuelan government bonds, are also permitted, as is the insurance of tankers carrying Venezuelan oil. Trading in Venezuelan gold is also permitted with immediate effect.

In a first step, these permits will initially be valid until mid-April 2024. This is the first time the U.S. administration has softened the sanctions against Venezuela, which have been in place for four years. In 2019, U.S. President Donald Trump had imposed tough sanctions on Venezuela because the regime of Nicolás Maduro had previously apparently rigged elections.

But now, after several rounds of secret negotiations with the U.S., the government in Caracas has pledged to hold clean elections in the second half of 2024. It pledged to do so in a joint declaration signed by the opposition and government representatives in Barbados on Tuesday of this week.

The government wants to allow foreign election observers. Whether it will actually allow opposition candidates to participate in the elections remains to be seen. The judiciary has stripped the main opposition leaders of their right to stand for election. The U.S. government has made clear that it expects progress on allowing opposition candidates to run by November. The sanctions relief can be lifted at any time.

The background to the rapprochement between the USA and Venezuela is the high oil prices. For strategic reasons, the USA wants the country with the world’s largest oil and gas reserves to supply the world market again. This will only be possible slowly because Venezuela has not invested in the oil industry for many years. Venezuela could soon export an additional 200,000 barrels a day.

The agreement is beneficial for all sides: Venezuela’s economy will get a boost in growth and investment from the lifted sanctions. For the first time, private companies will be able to invest legally in the Caribbean country again.

This is also interesting for German companies, which have traditionally been strong in Venezuela, but had withdrawn in recent years due to the country’s severe crisis.

The government, in turn, will be able to sell oil without the usual discount. Until now, customers such as China and India have demanded a discount on Venezuelan oil of up to 40 percent on the world market price. Traders and importers are thus compensating themselves for the risk of being caught in the crosshairs of the US judiciary.

Finally, the opposition would have the chance for fair elections, which it has largely been denied in the ten years Maduro has now been in power. It is to be hoped that the easing of sanctions can trigger a political momentum in addition to an economic one.

Because so far Maduro has never really shown any willingness to reach out to the opposition. It is hard to imagine that the autocrat would allow free elections with fair starting chances for all if there were a risk that he would be voted out of office.

Whether the regime is actually willing to give the opposition more room to maneuver will be seen next Sunday. The latter has called for nationwide primaries. The government had previously eliminated the electoral court by tactically withdrawing its judges because of the lack of a quorum.

The opposition faces the logistical challenge of organizing primaries in a country the size of France and Germany combined, without being able to use public buildings or otherwise count on government support. Given the constant intimidation and threats from the security forces, it takes a great deal of personal courage to participate in the electoral act.

Mercosur is at odds

One against all: In Mercosur, the states are at odds with Argentina over water rights on the Río Paraná. With the upcoming elections in the country, it could become even more difficult to find a common position in South America.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

A dispute over tolls on the Río Paraná shows how fragile the political and economic harmony in Mercosur is – at a time when the South American economic community actually wants to show unity in negotiations with the EU.

For example, since January 1, Argentina has imposed a freight charge of $1.47 per ton on all cargo ships passing through the Río Paraná at the level of the river town of Rosário.

Initially, it was mainly the governments of the landlocked countries of Bolivia and Paraguay that protested against the unilaterally imposed toll on the most important waterway in the center of South America. In the meantime, Brazil and Uruguay are also against the river toll.

But despite massive opposition from neighboring states and several crisis meetings in Asunción and Buenos Aires, no agreement is in sight.

As a countermeasure, Paraguay has now stopped supplying electricity to Argentina via the Yacyretá hydropower plant, which is jointly operated on the Río Paraná. Since then, Argentina has been forced to import electricity from Brazil at a higher price.

Argentina justifies the unilaterally levied toll with dredging works, which it would carry out to keep the river navigable. But the government refuses to make the investment figures transparent.

It is unlikely that there will be any movement soon in the muddled situation: Argentina is experiencing a severe economic crisis, its foreign currency coffers are empty – and at the same time a new government will be elected on October 22. Dollar revenues are vital for the government to be able to pay for imports of medicines and electricity, for example.

Argentina does not have a good reputation in the smaller Mercosur countries Uruguay and Paraguay. Its governments are traditionally considered difficult partners there.

From 2007 to 2010, for example, Argentina had the most important bridge connection to Uruguay blocked – by environmental protection movements in protest against a cellulose factory in Uruguay.

Santiago Peña has been in office as president of Paraguay for six weeks. He has already made it clear that he will not resign himself to the role of junior partner in Mercosur alongside the much larger economies of Brazil and Argentina.

If no agreement with the EU is reached by December 6, when Paraguay takes over the Mercosur presidency, he would break off negotiations and start trying with new economic partners in Asia and the Middle East.

But until then, Mercosur could face new potential for conflict. Argentina’s favored presidential candidate Javier Milei thinks little of Mercosur. He would rather look for new trading partners worldwide, he said during the election campaign.

Rosario-Victoria-Bridge — © Pixabay/Elías Alarcón

“Latin America’s GDP is twice that of India….

…but with only a third of the population”. Megainvestor Marcelo Claure believes Latin America could be in for its best years in a long time. Above all, the largest economies will drag the region along with them.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

The 52-year-old Marcelo Claure from Bolivia has a legendary reputation as an investor in Latin America. At the beginning of his career, he sold used cell phones from the U.S. to his home country. Later, he headed the legendary startup investment fund Softbank: alongside its founder Masayoshi Son, he was one of the world’s most powerful startup investors for years.

After parting ways last year, he has refocused on Latin America. On Harry Stebbing’s podcast recently, he explained why he thinks the continent’s future is so bright. They are illuminating insights.

Claure believes Latin America is being underestimated right now. “Latin America’s GDP is twice the size of India’s – but with one-third the population.”

For him, Latin America is so interesting as an investment location because there are more opportunities than capital, he said. “Everywhere else it’s the other way around: there’s more capital than investment opportunities – which drives up valuations.”

For example, a quarter of the world’s fintechs are located in Latin America. Brazil in particular has a highly developed financial market capable of handling complex financial transactions. The success of the online bank Nubank shows this.

Claure is confident about the future of the two most important markets in Latin America – Mexico and Brazil.

There are two reasons for this: “Nearshoring, or supply chain diversification, and the region’s rich raw material deposits form the basis for Latin America’s future economic stability and dynamism.”

Brazil, like Argentina, Chile and Peru, is benefiting from the global energy revolution. The region is the most important exporter of the ores and metals needed for e-mobility.

Mexico and Central America, in turn, would benefit above all from nearshoring and trigger a long-lasting growth spurt there. More and more corporations are relocating their production to Mexico. This gives them access to the large North American free trade zone USMCA.

What happens in Brazil and Mexico will determine the economic performance of the entire region: Together, the two economies account for around two-thirds of Latin America’s economic power and more than half of its population.

In a nutshell, it can be said that when these economies grow, they pull all the states in the entire region along with them. The reverse is not true.

But Claure also sees positive signs in chronic crisis states like Argentina, such as the skilled workforce there and the country’s potential in the technology sector. Some of the most successful former startups are now global corporations, such as the online retailer Mercado Libre or the software developer Globant.

For the Bolivian, Latin America is therefore facing its best decade in a long time. It is to be hoped that his previously proven instinct for investment will apply this time as well.

“China’s loss is not Mexico’s gain”

The country continues to rely on an investment boom due to the decoupling of the USA from China. The potential has only been partially exploited.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Mexico has overtaken China as the U.S.’s trading partner for the first time this year – the first time since 2014, when China took the top spot in the U.S. trade balance. The volume of trade between Mexico and the U.S. is impressive, with $263 billion in goods exchanged from January to April. By comparison, Brazil and the U.S. traded only ten percent of the value with each other in the same period, at $26 billion.

So it all looks like the recent predictions for nearshoring between the U.S. and Mexico will come to pass: After Donald Trump’s administration launched a trade war with China starting in 2019 and began to decouple from Asia’s largest economy, many economists expected Mexico in particular to benefit.

U.S. companies would locate their suppliers closer to them to reduce the risk of disruption to production chains. The Inter-American Development Bank (IDB) estimated last year that nearshoring in Latin America and the Caribbean could lead to $78 billion in additional goods and services exports annually in the short and medium term. Mexico should contribute the largest share of this.

This has partially come to pass. Like exports from Mexico to the U.S., foreign direct investment in Mexico has increased in order to upgrade the country as a supplier to the U.S.

Nevertheless, nearshoring as a whole remains below its potential. This is because Mexico’s exports to the USA have grown less than from countries such as Vietnam, India or Taiwan. At the same time, Mexican exports are concentrated mainly on industrial raw materials and foodstuffs, in addition to vehicles and parts.

Industrial products or machinery have been less prominent in Mexico’s export portfolio to the US. Oxford Economics puts it in a nutshell: “China’s loss is not Mexico’s gain”.

There are several reasons for this:

The government of President Andrés Manuel López Obrador is not business-friendly. The left-wing populist president is blocking investments in sustainable energy, and the state is hardly investing in other infrastructure either. But foreign companies in Mexico increasingly need energy that has been produced sustainably.

In addition, Mexico’s industry still functions primarily as a “maquiladora”: companies import parts from the USA, have them assembled in Mexico and export the finished products back to the USA. In the process, local value creation is low.

It only works with cheap labor. But labor is becoming more expensive in Mexico, too. In addition, companies need fewer and fewer simple workers. But Mexico also has a shortage of high-tech workers.

At the same time, local companies and the state are investing too little. Investment by foreign companies alone is not enough to advance Mexico’s industry as a whole.

Individual trailblazers like automaker Tesla, which is now investing in a $5 billion plant near Monterrey, or a manufacturer like BMW, which plans to produce cars with electric powertrains and batteries in Mexico, are important for Mexico’s strong automotive industry to remain competitive.

But they are not enough for Mexico to replace both China and other Asian producers as an industrial high-tech location. Oxford Economics analyzes: “The lack of domestic (public and private) investment prevents the country from taking full advantage of the nearshoring trend.”

Good news from the Amazon – but how is the EU reacting now?

Brazil’s Amazon clearing is falling again for the first time. At the same time, President Lula wants to unite South America’s governments to save the rainforest. The region is taking responsibility for protecting the Amazon.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

In the last few days there has been quite a bit of good news from the South American rainforest:

In Brazil, deforestation under President Luiz Inácio Lula da Silva has fallen by almost half in the first seven months of his term in office. The deforested area amounted to around 3,000 square kilometers, about as much as last in 2018. The restored state controls in particular are likely to have led to the decline in clearing in the Amazon.

At the same time, Lula held a summit of the Amazon states. There he met with representatives of the governments of Bolivia, Colombia, Ecuador, Guyana, Peru, Suriname and Venezuela to revive the Amazon Pact of 1978, which had fallen asleep.

Brazil automatically has the leading role in the initiative. Around 60 percent of the Amazon rainforest is located here, 13 percent in Peru, and ten percent in Colombia.

The negotiations were not easy: The countries were unable to agree on a deforestation freeze, which Brazil and Colombia are aiming for by 2030. This is problematic, because it is precisely in countries like Bolivia with far less rainforest that deforestation rates have skyrocketed. Last year, the country burned almost as much rainforest as the much larger Brazil.

It also remains open whether oil, gas or coal may be extracted from the rainforest in the future. Almost all countries do so. But Colombia – itself an important coal producer, but with oil sources that are drying up – wants to stop all exploration in order to avoid further greenhouse gas emissions.

The states were able to agree on increased coordination against increasing crime and organized crime in the Amazon region. A supra-regional scientific panel involving indigenous and other traditional Amazon forest dwellers has also now been established, modeled on the United Nations Climate Council. This is intended to provide scientific underpinning for government rainforest policy.

Despite the differing views on rainforest protection, the summit is a political success for South America and President Lula in particular. Because with his initiative, South America could contribute far more to rainforest protection than if Brazil or any country were to focus only on its share of the Amazon.

Lula has higher-flying plans. He doesn’t just want to act as South America’s spokesman on the Amazon. The Brazilian wants to convince other countries around the world that have rainforests and want to protect them to take joint action.

Lula is thus sending a strong signal to Europe. This applies above all to the negotiations on a free trade zone between the EU and Mercosur. To all those who have so far seen Brazil’s environmental policy as an obstacle to an agreement, Lula shows that South America has moved on the Amazon issue. Now it’s up to Europe to recognize that.

The EU and Latin America reconnect

The recent summit between the EU and Latin America ended with few concrete results. Nevertheless, the summit should not be underestimated: It served above all to take stock and update relations after almost eight years of speechlessness.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Nothing but expenses – one might think in view of the gigantic event that took place in Brussels on July 17 and 18. It was the third summit of the European Union and the Community of Latin American and Caribbean States (CELAC), the first of the EU member states and the 33 CELAC states in eight years. More than 50 heads of state met for two days – and little concrete came out of it.

But the governments on both sides of the Atlantic had prepared too little for this: Above all, many had hoped for the announcement of the agreement between the South American Mercosur and the EU.

Initially, Brazilian President Luiz Inácio Lula da Silva had stated that the treaty should be ready for signature by mid-year. But now the Brazilian government took two months to prepare a joint Mercosur negotiating offer in response to some important amendments proposed by the EU. Thus, there was no bid on the table in Brussels to negotiate either.

On the positive side, however, there appears to be continued confidence in both the EU and South America that the agreement will be reached this year after all. “I have rarely seen so much economic and political interest from the EU in Latin America,” said President Lula.

To be sure, the EU pledged $45 billion in infrastructure investments for Latin America. The EU wants to use this to implement its global gateway strategy in Latin America – the European response to China’s Silk Road initiative. The EU also wants to offer its partners capital for investment in infrastructure, as Beijing has been doing on a grand scale around the world for more than a decade. But so far, the EU has lacked flagship projects – especially in Latin America.

Chilean President Gabriel Boric scored a success in this context: The Andean country has now signed a declaration of intent with the EU for a future close partnership in sustainable raw material value chains.

This is of great importance for Europe: Chile is the world’s leading producer of the raw materials lithium and copper, which are important for the energy transition – and could soon become a supplier of green hydrogen.

But Chile could also benefit from the agreement: The EU not only wants to support the sustainable production of raw materials and purchase them from there. European companies will invest in the Andean country in order to increase the value-added share in the processing chain in South America. In the future, Chile could thus not only supply lithium, but possibly also produce batteries for e-cars.

But the summit also showed how difficult it is to build consensus in the regions themselves. For example, after initial hesitation, Latin American states wanted to agree to criticize Russia as an aggressor in Ukraine. But Nicaragua in particular – an ally of Russia in Central America – resisted, to the chagrin of many heads of state.

Conclusion: It will become clear in the coming months whether the establishment of contacts between Europe and Latin America in Brussels will lead to more intensive cooperation. The links between the regions have now been taken stock of and updated. Much more could hardly be expected after eight years of speechlessness.

Chile Atacama Desert — © Pixabay/Sebastian Basczyj

Brazil achieves historic tax reform

Several countries in Latin America have recently sought tax reforms – with mixed results. The change to the tax system now underway in Brazil is not perfect. But it shows that comprehensive improvements in the business environment are possible in Latin America if there is political consensus.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

In Chile, Congress rejected a comprehensive tax reform in March, triggering a new crisis between the government and the legislature. President Gabriel Boric has now called for a bipartisan consensus to get the law through parliament after all.

In Colombia, the government succeeded in passing a reform in December 2022 – after the previous attempt two years ago had led to severe social unrest. In Brazil, the government introduced a comprehensive tax reform last week, which was approved by a large majority in the Chamber of Deputies.

This is remarkable. After all, Brazilian governments have been trying to reform for several decades. But now the opposition and the government, as well as the states, have pulled together.

Unlike the reforms in Chile and Colombia, the main aim in Brazil is not to increase tax revenues. In Brazil, the chaotic and inefficient tax system is to be completely changed. Industrial companies in particular will benefit from this.

Thereafter, five taxes currently levied at source will be combined into two value-added taxes. As a result, the current tax levies on production at source will be gradually abolished by 2033 and shifted to consumption.

This avoids cascading taxes that companies have to pay on each new production step. They are partly responsible for Brazil being an expensive country in relation to average income.

At the same time, the tax system is becoming more transparent. Tax competition between states is shifting from the tax system to state budgets. In the future, companies will no longer be given tax breaks to locate in the state or city. If mayors or governors want to attract businesses with financial incentives, they will have to show the subsidies in their budgets. Then they have to justify to their voters why, for example, a carmaker should be subsidized with millions when at the same time there is no money for hospitals and schools.

The Ministry of Finance expects growth to increase by 12 to 20 percent over the next 15 years. Previously, numerous entrepreneurs, economists and financial investors from all political camps had defended the reform – despite its shortcomings.

Because the decisive factor now will be how the long-term implementation succeeds. The reform now goes to the Senate for a vote. Numerous industries have already been able to secure reduced VAT rates. However, the level of the VAT will only be determined over time. Tax increases will begin with minimal rates to estimate the tax base. Then, by 2033, existing taxes will be phased out.

Almost 40 percent of state tax revenues are affected by the reform. A second phase of the tax reform, in which higher incomes, property and dividends are taxed, is planned. It would be necessary to make Brazil’s tax system fairer. In few countries in the world are the differences in income and wealth as great as in Brazil.

Nevertheless, the reform is a huge step forward for Brazil’s economy and state. The renowned economist Samuel Pessôa believes that it could trigger a similar growth spurt as the “Plano Real” economic reform almost 30 years ago. In 1994, the currency reform succeeded in curbing decades of hyperinflation in Brazil and stabilizing the currency. The reform gave Brazil an economic and investment boom in the mid-1990s.

The reform initiated in Brazil gives hope for Latin America: It shows that comprehensive improvements in the framework conditions for business are possible in the region.

Buenos Aires, Santiago and Montevideo leading in quality of life in Latin America

Latin America’s business cities are expensive by international standards – but at the same time offer only medium quality of life.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Two recently published city rankings show how Latin American metropolises compare internationally.

The Liveability Index of the Economist Intelligence Unit (EIU) examines living conditions in 173 cities according to five categories: economic and political stability, health care, culture and environment, education and infrastructure.

The Global Wealth and Lifestyle Index of the Swiss private bank Julius Baer analyses the cost of a basket of goods and services for a very wealthy household in 25 cities worldwide.

Both studies apply completely different criteria in their analysis of living standards and costs in global metropolises. Nevertheless, interesting conclusions can be drawn – for example for companies that send employees to Latin America or people who want to work and live there temporarily.

Even the best Latin American metropolises are only in the global midfield in terms of quality of life. Buenos Aires, Santiago and Montevideo are leading the region. But this puts them far behind all the metropolises surveyed in Western Europe and North America, as well as the top group from Asia and Australia.

The quality of life in the three Latin American cities mentioned is comparable to that of Beijing or Shanghai, according to the EIU. São Paulo and Rio de Janeiro are slightly behind with Panama at the internationally lower level of cities like Johannesburg or Bangkok.

Despite this position in the lower midfield, three Latin American cities are among the 25 most expensive metropolises worldwide for the first time. São Paulo ranks 9th (ahead of Miami) for the cost of living for wealthy families. Mexico City follows in 21st place (like Frankfurt) and Santiago/Chile ranks 25th.

After Asia, the most expensive cities for the rich worldwide are found in North and South America – ahead of the metropolises of Europe, the Middle East and Africa, according to Julius Baer.

On the one hand, luxury goods and services have become so expensive in the cities of Chile, Brazil and Mexico because of the strength of the local currencies. On the other hand, countries like Brazil tax imported goods, so many products that are not made in the country are expensive by international standards. Real estate or local services (such as laser treatments), however, can be significantly cheaper than in comparable cities around the world.

But the sometimes high cost of living and a moderate quality of life in Latin America do not lead to uniform results in a third ranking.

The ExPat platform InterNations surveys expatriates, emigrants and digital nomads about the most popular locations worldwide: Mexico City ranked above average in third place worldwide at the end of last year. But no other Latin American metropolis was among the 50 cities listed worldwide.

LADW Buenos Aires Skyline — © iStock | Grafissimo

Can Brazil become the “Switzerland of Latin America”?

In recent days, positive reports about the Brazilian economy have been piling up. In the country itself, the government and Congress are arguing about the course to be set in economic policy.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

There is currently a change of mood in the Brazilian economy: At the beginning of June, the IBGE statistics office reported growth figures for the first quarter that were almost twice as high as most investment banks had expected.

The Brazilian economy grew by 4 percent compared to the same period last year. Agriculture in particular contributed to this boost, with an increase of almost 19 percent in twelve months. Stagnant Brazil thus suddenly found itself among the world’s four fastest-growing economies, according to a survey by Austin Rating.

Investment banks such as Goldman Sachs now expect Brazil to grow by 2.6 percent in 2023 instead of 1.9 percent. Other investment banks are also rushing to revise their forecasts for Brazil upward.

For the first time in years, the investment bank Verde Asset Management sees potential for value increases in Brazilian stocks and bonds. Verde’s otherwise skeptical analysts expect the real to strengthen and the high key interest rates (currently: 13.75 percent) to fall soon because inflation is also losing steam (3.94 percent in twelve months). With the package of budget rules just before Congress, the leftist Lula government has minimized the risk that it will increase spending disproportionately, analysts say.

Robin Brooks, President of the Institute of International Finance (IIF), also sees good prospects for Brazil. Thanks to its impressive trade surplus and the external stability it has achieved, Brazil is well on the way to becoming the “Switzerland of Latin America. A huge trade surplus is emerging that no other country in the region has”, he said. “This will give Brazil external stability and a strong currency,” the former Goldman Sachs strategist said on Twitter. Brooks also believes Brazil could become the “anchor of the region” as a country that will play a fundamental role in Latin America’s economic and financial stability.

The good mood on the financial markets contrasts with the low level of enthusiasm with which entrepreneurs view Lula’s government. From a business perspective, the president’s main ambition seems to be to roll back the positive economic reforms implemented by his right-wing populist predecessor Jair Bolsonaro.

He attacks the central bank for its high interest rates and would just as soon put it back under state control as the recently privatized energy company Eletrobras or the water industry. The government has already significantly increased its political influence over the oil company Petrobras and the national development bank BNDES.

But Lula’s bid to turn back the clock on state economic policy is being thwarted by the conservative Congress. This raises hopes for the reform agenda. The planned tax reform will be decisive for Brazil’s further economic development. The government and Congress intend to submit a first draft in the next few weeks.

Economists are unanimous in their opinion that tax reform for Brazil’s industry would be one of the best measures to significantly increase productivity in the short term. The prospects are good that Brazil could now take a step forward in this regard.

The chances for an EU-Mercosur free trade agreement are sinking

Environmentalists in Europe are calling for tougher rules in the agreement for Amazon protection. At the same time, doubts are growing as to whether Brazil can meet its own environmental targets at all. In addition, President Lula is increasingly losing his appeal as an integration figure in South America because of his foreign policy.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

The last few days have been bad news for everyone who has been hoping since the beginning of the year that the agreement between the EU and the South American Mercosur states would be concluded after all. With the change of president in Brazil from the right-wing populist Jair Bolsonaro to the left-wing Luiz Inácio Lula da Silva, the world’s largest free trade zone seemed to have a chance after all.

But now the good prospects have clouded over considerably – both in South America and in Europe.

In Germany – until now one of the most important supporters of the agreement in the EU – opposition to the agreement is growing in the government. For the Greens, the EU Commission’s proposed forest protection addendum to the Mercosur treaty is not enough. The Federal Ministry of Economics of Robert Habeck (The Greens) considers the proposal not far-reaching enough. Backed up by scientific studies, the ministry now wants concrete forest protection targets and instruments with which their failure can be sanctioned.

The chances that the Brazilians, as well as the other Mercosur governments in Uruguay, Paraguay and Argentina, will accept such a declaration are nil. Why should they let the Europeans, who cut down their own forests a long time ago, tell them how to deal with their own forest?

Lula has just presented a new industrial policy in Brazil. Under no circumstances does the government want to allow European companies to bid for public contracts. But for the Europeans, this is an important part of the free trade agreement. The Lula government – and this is no different in Argentina – wants to use public procurement to promote its own medium-sized industry.

At the same time, after six months in office, it is clear that Lula’s government is having great difficulty implementing the announced environmental and Amazon agenda as planned. On the one hand, the agrarian lobby and right-of-center politicians dominate Congress and are doing everything they can to thwart Lula’s indigenous and Amazon policies. At the same time, even Lula’s own coalition is far from unanimous on whether oil drilling should be allowed in the Amazon delta or whether a subsidy program for cars should be relaunched.

Moreover, Lula’s foreign policy is also coming under criticism in South America. He has just invited Venezuela’s dictator Nicolás Maduro to the South America summit and praised him as a flawless democrat. Presidents Gabriel Boric (Chile) and Luis Lacalle Pou (Uruguay) strongly disagreed. Lula is thus putting Brazil’s traditional leadership role in South America at risk.

Lula’s involvement as president of by far the largest economy in the region would be important in giving the EU-Mercosur agreement on the South American side the push it needs.

In Europe, Lula’s solidarity with dictators such as Xi, Putin, and Maduro is increasingly being criticized, as is his criticism of the United States and Europe. For example, he criticizes the North as the culprit for Venezuela’s or Argentina’s crises.

For opponents of the agreement with South America in Europe, these are all arguments against the agreement. So it will be more difficult than expected with the free trade agreement. But the window of opportunity for an agreement is still open until the end of the year. A lot can still change between now and then.

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